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Preparing for COVID-19 Recovery Loan Options & Forgiveness Strategies Weekly Update : June 11, 2020

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Page 1: Loan Options & Forgiveness Strategies - SAX LLP · This slide deck contains information on the COVID-19 related Loan Options & Forgiveness Strategies and is the most up-to-date as

Preparing for COVID-19 Recovery

Loan Options &

Forgiveness Strategies

Weekly Update: June 11, 2020

Page 2: Loan Options & Forgiveness Strategies - SAX LLP · This slide deck contains information on the COVID-19 related Loan Options & Forgiveness Strategies and is the most up-to-date as

This slide deck contains information on the COVID-19 related Loan

Options & Forgiveness Strategies and is the most up-to-date as of

June 11, 2020.

Changes are constant and additional guidance is on-going. We will

keep you posted on changes through our weekly webinar updates and

COVID-19 resource center. You can also reach out to your Sax

advisor for the most recent information.

Please visit our Resource Center at www.saxllp.com for on-going

updates, or email [email protected] with questions.

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Our firm provides the information in this webinar presentation for

general guidance only, and does not constitute the provision of legal

advice, tax advice, accounting services, investment advice, or

professional consulting of any kind.

The information provided herein should not be used as a substitute

for consultation with professional tax, accounting, legal, or other

competent advisers.

Before making any decision or taking any action, you should consult

a professional adviser who has been provided with all pertinent facts

relevant to your particular situation.

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Managing Cash FlowCPE Considerations

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Managing Cash FlowPoll #1CPE

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Today’s Agenda

• Introduction

• Updates

– Paycheck Protection Program Flexibility Act of 2020

– Economic Injury Disaster Loans (EIDL)

– Future State

• Main Street Lending Program

• PPP Loan Forgiveness

• Open Discussion

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Updates

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UpdatesPaycheck Protection Program Flexibility Act of 2020

• Paycheck Protection Program Flexibility Act of 2020

– Signed by the President on June 5, 2020

– Swift governmental action to enhance PPP

– SBA & Treasury Department have announced that guidance will be issued shortly

• Highlights include:

– Extension of the loan term from 2 years to 5 years

– Expansion of the overall PPP from June 30, 2020 to December 31, 2020• Must receive funding by June 30, 2020

– Extension of the Covered Period from 8 weeks to the earlier of:

• 24 weeks from loan origination; or

• December 31, 2020

• Election for 8 week covered period is available

– Modification of the 75%/25% payroll cost/non-payroll cost split to 60%/40%, respectively

• Clarified that no “cliff” exists

– Removal of restrictions on the deferral of employer-side social security taxes

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UpdatesPaycheck Protection Program Flexibility Act of 2020 (cont’d)

Highlights include:– Alteration of the 6 month loan deferral

• Borrowers would be able to defer payments until the date on which the amount of forgiveness is

remitted to the lender

– Favorable adjustments to the re-hire exceptions

• Extends deadline date from June 30, 2020 to December 31, 2020

• Removes negative forgiveness implications for reduced FTEs during the period from February 15,

2020 – December 31, 2020 if the borrower makes a good faith effort to:

– Rehire personnel employed as of February 15, 2020; and

– Rehire similarly qualified employees for unfilled positions by December 31, 2020; or

– Return to the same level of pre-February 15, 2020 business activity, but is unable to do so due to

governmentally-established requirements implemented between March 1, 2020 – December 31, 2020,

related to maintenance of standards for sanitation, social distancing, or any other COVID-19 related

worker or customer service requirements

» DOCUMENT, DOCUMENT, DOCUMENT

• Addition of borrower requirement to apply for forgiveness within 10 months of the close of the

Covered Period or face repayment obligation (including lender fees)

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UpdatesEconomic Injury Disaster Loan Program

• Economic Injury Disaster Loan Program

– $150,000 is now the maximum funding

• Funding process has begun for a number of borrowers

– Collateral/personal guarantee requirements have changed

– $10K advance limit up to $1k x 10 employees

– No forgiveness aspect (other than potential $10K advance)

• $10K advance will reduce PPP loan forgiveness amount

– Net worth and taxable income limitations

– Detailed application process through SBA

• Currently only agricultural businesses may apply

– 30 year amortization, 2.75% - 3.75% interest rate

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UpdatesWhat does the future hold?

• Congress & the President moved quickly to enact PPP legislation

• Future, larger spending bills likely will not move as quickly

– HEROES Act

• Improved unemployment outlook per latest reports

– Employment rose by 2.5 million in May 2020

– Unemployment rate declined as well

• Differences of opinion exist in terms of the next stimulus bill, but priorities include:

– Increased COVID-19 testing & tracing measures

– Lengthened unemployment benefit

– Governmental & small-to-medium size business benefits

– Aid for essential workers & others who have put their life on the line

– Clean energy

– Infrastructure enhancements

– Additional economic stimulus to individuals & families

– $10K SALT cap

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Managing Cash FlowPoll #2CPE

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Main Street Lending Program

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Main Street Lending ProgramOverview

• Federal Reserve takes $2.3 trillion action on April 9, 2020

– Updated guidance released April 30, 2020

– Additional updated guidance released on June 8, 2020

• Number of different economic-bolstering measures, but we will focus on $600 billion

in funding associated with:

– Main Street New Loan Facility (“MSNLF”)

– Main Street Priority Loan Facility (“MSPLF”)

– Main Street Expanded Loan Facility (“MSELF”)

• Intended to provide credit for small and medium-sized businesses in sound financial

condition prior to the COVID-19 outbreak until conditions normalize

• Sign up at Federal Reserve Bank of Boston’s website to receive updates on the

program

– See page 49 of the June 8, 2020 Main Street Lending Program FAQs for a link

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Main Street Lending ProgramOverview (cont’d)

• Borrowers can use one, but not all facilities

– Loans are not forgivable!

• Authorized under Section 13(3) of the Federal Reserve Act

• Federal Reserve Bank of Boston committed to lend to a single common special

purpose vehicle (“SPV”) on a recourse basis

– SPV will purchase 95% participation in all facilities

– Lenders will retain 5% of each loan

• $75 billion equity investment from the Treasury Department in the SPV

• SPV will cease purchasing loan participations on September 30, 2020

– Federal Reserve & Treasury Department will assess and may adjust accordingly

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Main Street Lending ProgramFacility Types

• MSNLF: New term loans that, at the time of origination and thereafter, must not be contractually

subordinated in terms of priority to any of the borrower’s other loans or debt instruments

• MSPLF: New term loans that, at the time of origination and thereafter, must be senior to or pari passu

with, in terms of priority and security, the borrower’s other loans or debt instruments, other than

mortgage debt

– At the time of origination, borrowers may refinance existing debt owed to other lenders

• MSELF: New term loans that increase or upsize existing term loans or credit facilities. At the time of

upsizing and thereafter, the upsized tranche must be senior to or pari passu with, in terms of priority

and security, the borrower’s other loans or debt instruments, other than mortgage debt

• Common Information

– Eligible Lender & Eligible Borrower criteria

– If secured, collateral should be described in accordance with the lender’s ordinary loan documentation practices

– Must include quarterly financial reporting covenant

• Appendix C of the June 8, 2020 FAQs contains specifics

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Main Street Lending ProgramLender Eligibility

• Lender Eligibility Requirements

– U.S. federally insured depository institution

• Includes banks, savings associations or credit unions

– U.S. branch or agency of a foreign bank

– U.S. bank holding companies

– U.S. savings and loan companies

– U.S. intermediate holding companies of foreign bank organizations

– U.S. subsidiaries of any of the organizations above

• Expected to conduct an assessment of each potential borrower’s financial condition as part

of application process

• Any existing loans (or revolving credit facilities in the case of MSELF) must have “pass”

equivalent rating

– Based upon Federal Financial Institutions Examination Council’s supervisory rating system

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Main Street Lending ProgramBorrower Eligibility

• Borrower Eligibility Requirements

– Established prior to March 13, 2020

– Not an ineligible business (discussed on following slide)

– Meets at least one of the following two conditions

• $15,000 or fewer employees; or

• $5B or less in 2019 annual revenues

– Created or organized in the U.S. or under U.S. laws with significant operations and a majority of

employees in the U.S. (discussed on following slide)

– Cannot participate in the Primary Market Corporate Credit Facility

• Federal Reserve program designed to support large companies by

– Purchasing eligible corporate bonds and

– Lending through syndicated loans

– Has not received support pursuant to the Coronavirus Economic Stabilization Act of 2020 (Subtitle

A of Title IV of the CARES Act)

• PPP loans & EIDLs are not included in Title IV and thus do not impact eligibility

– Commercially reasonable effort to maintain payroll & retain employees

• “Undertake good-faith efforts to maintain payroll and retain employees, in light of its capacities, the

economic environment, its available resources, and the business need for labor”.

– Note that borrowers who have laid-off and/or furloughed workers are still eligible

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Main Street Lending ProgramBorrower Eligibility (cont’d)

• For-Profit Businesses

– JVs maximum foreign ownership = 49%

– Tribal business as defined in 15 U.S.C. Sec 657(b)(2)(C)

– Federal Reserve may consider other forms (i.e., NFP entities)

• Ineligible Businesses

– Title 13, Section 120.110 of the Code of Federal Regulations

• Subsections (b) – (j); and

• Subsections (m) – (s)

– PPP modifications to these eligibility requirements apply here as well

• Refer to interim final rules released by SBA

• U.S. Based Requirements– Businesses evaluated on a consolidated basis with its subsidiaries, but not its parent or brother-sister affiliates

– Greater than 50% of the borrower’s:

• Assets are located in the U.S;

• Annual net income is generated in the U.S.;

• Annual net operating revenues are generated in the U.S.; or

• Annual consolidated operating expenses (including interest expense and any other expenses associated

with debt service) are generated in the United States

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UpdatesMain Street Lending Program – Comparative Chart

MSNLF MSPLF MSELFUpsized Tranche Underlying Loan

Maturity 5 years 5 years 5 years Remaining maturity of at least 18 months (taking into account adjustments made to the maturity of the underlying loan after April 24, 2020, including at the time of the upsizing)

Principal Deferral 2 years 2 years 2 years N/A

Interest Deferral 1 year 1 year 1 year N/A

Unpaid Interest Capitalization

Yes Yes Yes N/A

Interest Rate LIBOR (1 or 3 month) + 300 basis points

LIBOR (1 or 3 month) + 300 basis points

LIBOR (1 or 3 month) + 300 basis points

N/A

Prepayment No penalty No penalty No penalty N/A

Origination Date After April 24, 2020 After April 24, 2020 After April 24, 2020 On or before April 24, 2020

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UpdatesMain Street Lending Program – Comparative Chart (cont’d)

MSNLF MSPLF MSELFUpsized Tranche Underlying Loan

Principal Amortization Schedule

15% at the end of the 3rd

year & 4th year; 70% at the end of the 5th year

15% at the end of the 3rd

year & 4th year; 70% at the end of the 5th year

15% at the end of the 3rd

year & 4th year; 70% at the end of the 5th year

N/A

Minimum Loan $250,000 $250,000 $10 million N/A

Maximum Loan lesser of (i) $35 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed 4x the borrower’s adjusted 2019 EBITDA

lesser of (i) $50 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed 6x the borrower’s adjusted 2019 EBITDA

lesser of (i) $300 million or (ii) an amount that, when added to the borrower’s existing outstanding and undrawn available debt, does not exceed 6x the borrower’s adjusted 2019 EBITDA

N/A

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UpdatesMain Street Lending Program – Fees

• Transaction Fees

– Lender will pay a fee to the SPV at the date of origination

• MSNLF & MSPLF = 100 basis points

• MSELF = 75 basis points

– May be passed along to the Borrower

• Loan Origination/Upsizing Fee

– Borrower will pay a fee to the Lender at the date of origination/upsizing

• MSNLF & MSPLF = 100 basis points

• MSELF = 75 basis points

– SPV will pay an annual fee of 25 basis points to the Lender

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UpdatesMain Street Lending Program – Lender Attestations & Certifications

• MSNLF, MSPLF & MSELF

– Commit that it will not request that the Eligible Borrower repay debt extended by the Eligible Lender

to the Eligible Borrower, or pay interest on such outstanding obligations, until the Eligible Loan or

Upsized Tranche is repaid in full, unless the debt or interest payment is mandatory and due, or in

the case of default and acceleration

– Commit that it will not cancel or reduce any of its committed lines of credit to the Eligible borrower,

except in the event of a default

– Certify that the methodology used for calculating the Eligible Borrower’s adjusted 2019 EBITDA for

the leverage requirement is the methodology it has previously used for adjusting EBITDA when

extending credit to the Eligible Borrower or similarly situated borrowers on or before April 24, 2020

– Certify that it is eligible to participate in the Facility, including in light of the conflicts of interest

prohibition in CARES Act Section 4019(b)

• Discussed on following slides

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UpdatesMain Street Lending Program – Borrower Attestations & Certifications

• MSNLF, MSPLF & MSELF

– Refrain from repaying the principal balance of, or paying any interest on, any debt until the Eligible

Loan is repaid in full, unless the debt or interest payment is mandatory and due.

• MSPLF Only: At the time of loan origination, Eligible Borrower may refinance an existing debt

to a lender that is not the Eligible Lender

– Commit to not seek to cancel or reduce any of its committed lines of credit with the Eligible Lender

or any other lender

– Certify that it has a reasonable basis to believe that, as of the date of origination of the Eligible

Loan and after giving effect to such loan, it has the ability to meet its financial obligations for at

least the next 90 days and does not expect to file for bankruptcy during that time period

– Commit to follow compensation, stock repurchase and capital distribution requirements

• Generally applies for the period from loan origination through 12 months post-loan repayment period

– Certify that it is eligible to participate in the Facility, including in light of the conflicts of interest

prohibition in CARES Act Section 4019(b)

• Discussed on following slides

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UpdatesMain Street Lending Program – Borrower Limitations & Restrictions

• Compensation Limits

– Officers or employees with 2019 calendar year compensation between $425,000 - $3M limited to

2019 amounts

• Severance pay or other benefits received upon termination shall not exceed twice the total compensation

received by the officer or employee in 2019 calendar year

– Officers or employees with 2019 calendar year compensation in excess of $3M limited to $3M +

50% of excess over $3M

– Compensation includes salary, bonuses, awards of stock and other financial benefits

• Stock Repurchase Restrictions

– Cannot repurchase an equity security that is listed on a national securities exchange of the

business or the parent company of the business (except to the extent of a contractual obligation

prior to March 27, 2020)

• Capital Distribution Requirements– Cannot pay dividends or make capital distributions with respect to the common stock

– Pass-thru businesses may make tax distributions to the extent of shareholder/partner earnings

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UpdatesMain Street Lending Program – Conflict of Interest Provisions

• Section 4019(b) of the CARES Act

• Lenders & Borrowers required to certify that no “Covered Individual” owns, controls, or holds

20% or more of the vote or value of any class of equity interest in the borrower– Family member aggregation rules apply

• Covered Individuals include:– President Trump

– Vice President Pence

– Head of any Executive Department

– Members of Congress

– Certain immediate family members

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Managing Cash FlowPoll #3CPE

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PPP Loan Forgiveness

Open Questions

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PPP Loan ForgivenessOpen Questions

The following questions are still unclear and need further guidance from the SBA:

1. For enterprises that are closed and are not making payroll costs (or other payments), does the

alternative covered payroll period start with the date the first payroll payment is made?

a. Or, can they delay the commencement of the Covered Period period only to the date that the

next payroll period should have started had they made the payroll?

2. How does the Covered Period increase from 8 weeks to 24 weeks impact payroll and non-payroll

costs?

3. How does the paid and incurred standard impact retirement benefit forgiveness?

4. Are corporate shareholders who also are employees allowed to include non-cash benefits in

forgiveness requests where partners and other self-employed individuals are expressly forbidden?

5. Will the expenses be deductible for tax purposes?

6. How will the state taxing jurisdictions treat the forgiven funds?

7. Will the costs eligible for forgiveness be expanded?

8. What is the definition of a transportation utility?

9. Will there be a separate application for seasonal employers?

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PPP Loan ForgivenessOpen Questions (cont’d)

The following questions are still unclear and need further guidance from the SBA:

10. When can borrowers apply for forgiveness?

11. How does the December 31, 2020 rehire date impact borrowers who want to apply for forgiveness

prior to this date?

12. When will new guidance be released by the SBA and/or Treasury?

13. How many times will this application change prior to being submitted?

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PPP Loan Forgiveness

Documentation

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PPP Loan ForgivenessDocumentation Submission Requirements

• Borrowers must maintain documentation for 6 years after the date the loan is

forgiven or repaid in full

• SBA and The Office of Inspector General must be allowed to access documents

upon request

• Payroll

– Documentation of eligible cash and non-cash compensation amounts

• Bank statements, third-party payroll service provider reports and applicable payroll

tax filings; and

• Support for employer contributions to health insurance and retirement plans

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PPP Loan ForgivenessDocumentation Submission Requirements (cont’d)

• Non-Payroll

– Documentation verifying pre-February 15, 2020 lease and/or utility obligations

• Amortization schedules, bank statements, cancelled checks, receipts, lease

agreements and/or utility invoices

• Average number of FTEs

– February 15, 2019 – June 30, 2019;

– January 1, 2020 – February 29, 2020; or

– Any consecutive 12-week period between May 1, 2019 – September 15, 2019 (seasonal

employers)

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PPP Loan ForgivenessDocumentation Record Retention Requirements

• While not required for submission, borrowers must maintain the following records:

– Employee by employee documentation for the amounts included in payroll costs both

above and below the annual $100,000 limit;

– Documentation regarding employee separation events, including job offers and refusals,

firings for cause, voluntary resignations and written requests by any employee for work

schedule reductions; and

– Documentation supporting the FTE Reduction Safe Harbor

• Optional PPP Borrower Demographic Information Form

– Completion/Non-Completion has no bearing on forgiveness

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PPP Loan ForgivenessCertification Documentation

AM I THE INTENDED RECIPIENT OF THE LOAN?

Questions you should be asking to determine if your business is an intended recipient include:

• Based on the facts and circumstances known at the time you applied for the loan, can you

prove that you had a reasonable belief that your business was or would be negatively

impacted:

– Did you lose key customers or a significant number of customers, or anticipate that you

would?

– Did you have a valid basis to believe that customers would slow pay or become non-

payers?

– Did you lack access to financial resources to be able to withstand a decline in revenue?

• Can you prove the facts and circumstances for the first bullet point with written

documentation?

• From the date that you applied for the loan and the date that you received it, has the

business improved or declined?

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PPP Loan ForgivenessCertification Documentation

What if my business was not negatively impacted despite COVID-19 and I

received a PPP loan?

– There are three considerations:

1. Certification: If your business improved financially despite COVID-19, and you

received a PPP loan, serious consideration needs to be given as to whether the

certification was falsely made.

2. Forgiveness

3. Repayment: If the certification is believed by the government to have been falsely

made, the government can require immediate repayment

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PPP Loan ForgivenessCertification Documentation

Each borrower should consider the impact of this newly issued clause and document

the reason(s) to support PPP eligibility. Examples include, but are not limited to:

– Do you have access to capital outside the PPP (i.e., line of credit, significant cash

reserves, other capital resources)?

– Is your business open? If yes, are you operating with a reduced staff?

– Did you have a decline in current sales and/or a cancellation of future orders?

– Have your receivable collections decreased and/or have your customers requested more

favorable payment terms?

– Any supply chain issues (i.e., diminished access to product or materials, inability to

deliver product, reduced access to labor market)?

– Are your customers/vendors applying for PPP funding?

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PPP Loan ForgivenessCertification Documentation

• We encourage all businesses who have applied or plan to apply for the PPP loan to

document their rationale as to why the loan is necessary to support ongoing

operations.

• Preparation of a 30/60/90 day cash flow analysis taking into account loss of income,

slowdown of receivable collections, lack of currently available credit facilities,

potential employee layoffs or furloughs, debt repayments, projected expenses and

other cash disbursement commitments would be one example to demonstrate that

the PPP loan is needed to be able to support ongoing operations.

• Management / Board should formalize guidance

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Managing Cash FlowPoll #4CPE

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Open Discussion

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Upcoming Webinar

Thursday, June 18 @ 10 AM

Weekly Recovery Update: COVID-19 Loan Options and Forgiveness Strategies

• For additional questions: Email [email protected]

• Visit Sax’s COVID-19 Resource Center found on Saxllp.com to register for

webinars and for on-going information and resources.

More Resources